LONDON (Reuters) – Fund managers who bought derivatives to protect their portfolios before the stock market’s recent downturn could have made a quick 10-fold return but most have held onto the insurance ahead of what is expected to be a turbulent summer.
The FTSE 100 index has tumbled more than 7 percent over the past three weeks on concerns over inflation and the direction of interest rates, worries that economic growth may fade and concerns about red-hot commodity prices.
However, in the weeks leading up to the downturn some fund managers bought put options — which offer the owner the right to sell an asset at a pre-determined price — to give their portfolios some protection against a stock market fall.
Since the market downturn the price of puts has rocketed and those managers have profited as a result.
For example, a FTSE 100 index put option with a strike price of 5,925 expiring in June 2006 was worth 73 pounds on May 10 when the FTSE 100 index closed at 6,083.4.
By May 22, when the FTSE closed at 5,532.7, the price of the same put had soared to 779 pounds.
